Lofty expectations for twin peaks

Anthony Smith, a partner in the risk advisory practice at Deloitte, noted that the emphasis on conduct in industry-related matters has been long coming — but that a lot of spending directed to these issues could be considered “good practice in the first place”.

“One could argue that a financial services organisation should have been analysing this data and information to adequately run their business and truly understand their customers,” he said.

The richness of data provided for reporting can be used to make better business decisions, he added.

There will be an increase in an institution’s headcount, systems, monitoring and enforcement, resulting in higher costs, Smith said, which “will be passed on to the consumer either via taxes or levies imposed on the sector, which will translate into higher bank charges”.

But it was important, from an “SA Inc point of view”, that the country was, and was seen to be, taking steps to increase regulatory oversight and protect depositors’ money, Smith said. “The benefit that comes through enhanced reputation and consequently increased investment has been shown to far outweigh the costs of doing it.”

Nevertheless, compliance-related costs will continue to increase, he warned.

“There have been significant cost increases over the past 10 years, resulting largely from the response to conduct-related matters such as mis-selling, reckless lending, price fixing and fictitious accounts that continue to plague the industry,” said Smith.

Although there will be additional costs, there are also efficiencies being built into the system, the FSCA’s Caroline da Silva said at a recent workshop on the implementation of twin peaks.

“A bank or insurer might have 16 [financial services provider] licences; all of those have a cost. In future, they will have one licence, one supervisory team, so there’s efficiencies being built in,” she said.

Co-ordination imperative

The policy decision to exclude the National Credit Regulator (NCR) from the twin peaks architecture has baffled industry players and has been described as a missed opportunity. The regulator, which falls under the ambit of the department of trade and industry, is responsible for regulating the credit industry under the National Credit Act.

It is one of the reasons the Democratic Alliance refused to vote in favour of the Act in Parliament.

The DA’s Alf Lees said the effect of the decision not to include the NCR under the FSCA will render the conduct authority toothless in the credit industry. It would also compromise an important objective of the Bill, which is to improve the co-ordination of financial sector regulators in South Africa.

But Da Silva said this did not mean the FSCA would have no authority over the credit sector. According to the Financial Sector Regulation Act, the NCR will be responsible for the contracting of credit and the FSCA will be responsible for the conduct around the provision of that credit, she said.

What this will mean in practical terms is being discussed as part of a memorandum of understanding being signed between the NCR and the FSCA. It will determine where the NCR’s jurisdiction ends and the FSCA’s begins, Da Silva said.

The co-ordination between regulators, especially the prudential authority and the FSCA, will be a key test for the new regime, said Rosemary Lightbody, a senior policy adviser at the Association for Savings and Investment South Africa.

“It will be very frustrating for, and will hamper, business if the communication between the two authorities is not smooth,” she said. But if twin peaks delivers on what has been promised, including more timely and appropriate regulatory intervention, the additional costs of regulation under twin peaks could very well be worth it, she said.

Some lingering questions

But would the implementation of twin peaks have been able to prevent a collapse of African Bank or the recent crisis at VBS?

According to Unathi Kamlana, the head of policy, statistics and industry support at the prudential authority, “no framework is foolproof. It’s about how … one is empowered, as a regulator, to deal with failure when it occurs.”

Twin peaks confers a range of new powers on the regulators aimed at establishing a more proactive, riskbased approach to regulation. In the case of the prudential authority, the twin peaks regime creates an supervisory framework for systemically important financial institutions, such as major conglomerates.

Kamlana said that, until now, the Reserve Bank’s supervisory role has extended to the holding company of a bank and the entities that fall under the holding company. “But there might be other interests in a broader financial conglomerate [with] risks emanating from entities that are not consolidated within the scope that we have oversight of, which have implications for the prudential soundness of the group,” he explained.

To combat such risks, the twin peaks regime provides new powers over such institutions, including the ability to order the restructuring of a conglomerate. According to the treasury, the FSR Act also provides regulators with more informationgathering powers than previously. These include “intrusive” onsite visits, typically with a warrant to obtain information, and have already been used in the case of VBS, it said.